First Steps: Writing the Operations Section of Your Business Plan
In their book , the staff of Entrepreneur Media, Inc. offer an in-depth understanding of what’s essential to any business plan, what’s appropriate for your venture, and what it takes to ensure success. In this edited excerpt, the authors discuss what type of information you should include in the operations section of your business plan.
Operations is concerned with how you buy, build and prepare your product or service for sale. That covers a lot of ground, including sourcing raw materials, hiring labor, acquiring facilities and equipment, and shipping the finished goods. And it’s different depending on whether you’re a manufacturer, a retailer or a service firm.
The basic rule for your operations section is to cover just the major areas—labor, materials, facilities, equipment and processes—and provide the major details—things that are critical to operations or that give you competitive advantage. If you do that, you’ll answer investors’ questions about operations without overwhelming them.
The simplest way to treat operations is to think of it as a linear process that can be broken down into a sequence of tasks. Once the initial task listing is complete, turn your attention to who's needed to do which tasks. Keep this very simple and concentrate on major tasks such as producing a product or delivering a service.
Operations for Retail and Service Firms
Retail and service firms have different operations requirements from manufacturers. Companies that maintain or repair things, sell consulting or provide health care or other services generally have higher labor content and lower investments in plants and equipment.
That’s not to say operations are any less important for retailers and service firms. But most people already understand the basics of processes such as buying and reselling merchandise or giving haircuts or preparing tax returns. So you don’t have to do as much explaining as, say, someone who’s manufacturing microprocessors.
For service and retail firms, people are the main engines of production. The cost of providing a service is largely driven by the cost of the labor it entails. A service-firm plan, then, has to devote considerable attention to staffing. You’ll want to include background information and, if possible, describe employment contracts for key employees such as designers, marketing experts, buyers, and the like. You’ll want to walk the reader through the important tasks of these employees at all levels so they can understand how your business works and what the customer experience is like.
Operations plans for retailers also devote considerable attention to sourcing desirable products. They may describe the background and accomplishments of key buyers. They may detail long-term supply agreements with manufacturers of in-demand branded merchandise.
Operations for Manufacturers
The lead actor in manufacturing is the process of production, and the better your production process, the better a manufacturer you'll be. Business plan readers look for strong systems in place to make sure that personnel and materials are appropriately abundant. In your operations section, don't go into too much detail — stick to the important processes, those essential to your production or that give you a special competitive advantage and be sure you show that you have adequate, reliable supply sources for the materials you need to build your products. Estimate your needs for materials and describe the agreements with suppliers, including their length and terms that you have arranged to fulfill those needs. You may also give the backgrounds of your major suppliers and show that you have backup sources available should problems develop.
You'll also need to include information on how you'll ensure a reliable supply of adequately trained people to run your processes. You’ll first need to estimate the number and type of people you'll require to run your plan. Then show that you can reasonably expect to be able to hire what you need. Look at local labor pools, unemployment rates and wage levels using information from chambers of commerce or similar entities.
Manufacturing a product naturally requires equipment. Naturally, investors are very interested in your plans for purchasing equipment. Many plans devote a separate section to describing the ovens, drill presses, forklifts, printing presses and other equipment they’ll require. This part of your plan doesn’t have to be long, but it does have to be complete. Make a list of every sizable piece of equipment you anticipate needing. Include a description of its features, its functions, and, of course, its cost.
Be ready to defend the need to own the more expensive items. Bankers and other investors are loath to plunk down money for capital equipment that can be resold only for far less than its purchase price. Also consider leasing what you need if you're starting out.
The Facilities Section
Unless you’re a globe-trotting consultant whose office is his suitcase, your plan will need to describe the facilities in which your business will be housed. Land and buildings are often the largest capital items on any company’s balance sheet, so go into detail about what you have and what you need. Decide how much space you require in square feet. Don’t forget to include room for expansion if you anticipate growth. Now consider the location. You may need to be close to a labor force and materials suppliers. Transportation needs, such as proximity to rail, interstate highways, or airports, can also be important. Next determine whether there's any specific layout that you need.
To figure the cost of facilities, first decide whether you'll lease or buy space and what your rent or mortgage payments will be. Don’t forget to include brokerage fees, moving costs and the cost of any leasehold improvements you’ll need. Finally, take a look at operating costs. Utilities including phone, electric, gas, water, and trash pickup are concerns; also consider such costs as your computer connections, possibly satellite connections, as well as maintenance and general upkeep.
These aren’t the only operations concerns of manufacturers. You should also consider your need to acquire or protect such valuable operations assets as proprietary processes and patented technologies. For many businesses, intellectual property is more valuable than their sizable accumulations of plants and equipment.